Retailers frequently initiate promotions and/or marketing campaigns to boost sales and ultimately increase profit. There are many types of promotions that a retailer may initiate depending on the time frame and the type of retail items, including temporary price cuts, price reductions with bundled buys or bonus buys, rebates, etc. Further, the promotions can be advertised in various formats through multiple channels, including an advertisement in a newspaper or a website, coupons and circulars using direct mail, in-store point-of-purchase display, etc.
During a promotion time period, while the sales volume of the merchandise items being promoted are expected to increase, sales of some other items may drop due to the consumer switching their normal purchase to the promoted items in order to get a lower price or an overall better deal. Meanwhile, sales of some merchandise items may actually be affected in a favorable way. For example, promoting hot dogs may increase the sales of hot dog buns.
Therefore, the effect of promotions on sales and revenue is not limited to the promoted merchandise items only, but potentially extends to other merchandise that is not being promoted at the time. For retail merchandising, planning, and revenue management, an accurate sales forecast in the presence of promotions is critical. This type of “promotional cross-item” (“PCI”) effect, as a contributing factor to overall sales forecast, should be accounted for correctly.